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fundamentals engineering economics
Questions and Answers of
Fundamentals Engineering Economics
50. Main Electric is deciding whether to invest $10,600,000 in a new plant.An analyst forecasts that the plant will generate the independent random cash fl ows shown in the table below at the end of
49. An initial investment of $22,500 results in independent annual receipts of$6,250 until the end of the project life. The probability distribution for the life of the project is shown in the table
48. Company W is considering investing $12,500 in a machine. The machine will last N years, at which time it will be sold for L. Maintenance costs for this machine are estimated to increase by
47. In problem 46, suppose the MARR were 10% with probability 0.25, 12%with probability 0.50, and 15% with probability 0.25; what is the probability that Alternative A is the most economic
46. Two investment alternatives are being considered. Alternative A requires an initial investment of $15,000 in equipment; annual operating and maintenance costs are anticipated to be normally
45. Solve problem 44 using a discount rate of (a) 0%, (b) 15%.
44. Consider an investment alternative having a 6-year planning horizon and expected values and variances for statistically independent cash fl ows as given below:Using a discount rate of 10%,
43. Suppose n 5 4, i 5 0%, a $11,000 investment is made, and the receipt in year j, j 5 1, . . . , 4, is statistically independent and distributed as in problem 40.Determine the probability
42. In problem 41 suppose the initial investment is equally likely to be either$9,000 or $11,000. Analytically determine the probability that the investment will be profi table.
41. In problem 38 suppose the minimum attractive rate of return is distributed as given in problem 39 and suppose the annual receipts are distributed as given in problem 40. Analytically determine
40. In problem 38 suppose the magnitude of the annual receipts (R) is subject to random variation. Assume that each annual receipt will be identical in value and the annual receipt has the following
39. In problem 38 suppose the MARR is not known with certainty and the following probability distribution is anticipated to hold:i p(N)0.10 0.20 0.12 0.60 0.15 0.20 Use analytical methods to
38. Assume an initial investment of $12,000, annual receipts of $4,500, and an uncertain life for the investment. Use a 15% MARR. Let the probability distribution for the life of the investment be
37. An investment of $15,000 is to be made into a savings account. The interest rate to be paid each year is uncertain; however, it is estimated that it is twice as likely to be 6% as it is to be 4%,
36. Reconsider the data in Problem 35. Based on a present worth measure of worth, complete a multi-parameter sensitivity analysis that examines all possible combinations of the estimates.
35. GO Tutorial Initial estimates of the parameters for an investment are given below.You wish to do a multiparameter sensitivity analysis based on the sensitivities shown. AW is the preferred
34. The owners of a discount motel chain are considering building a new motel. Optimistic, pessimistic, and most likely estimates of several key parameters have been obtained from the local builders
33. A warehouse modernization plan requires an investment of $3 million in equipment. At the end of the 10-year planning horizon, it is anticipated the equipment will have a salvage value of
32. Plot a sensitivity graph for annual worth versus initial cost, annual revenue, and salvage value for the data in the table below. Vary only one parameter at a time, each within the range of 220%
31. In problem 20 suppose the following pessimistic, most likely, and optimistic estimates are given for building cost, furnishings cost, annual operating and maintenance costs, and the average rate
30. Video Solution A new project will cost $80,000 initially and will last for seven years, at which time its salvage value will be $2,500. Annual revenues are anticipated to be $15,000 per year. For
29. Plot a sensitivity graph for annual worth versus initial cost, annual revenue, and salvage value for the data in the table on the next page. Vary only one parameter at a time, each within the
28. You have been asked to perform a sensitivity analysis on a company’s plan to modernize its facilities to determine the impact of possible errors in estimating the net annual savings. The
27. A pork processing facility is considering the installation of either a storage facility or a holding pond. A biosystems engineer has been hired to evaluate the economic tradeoffs for the two
26. Two condensers are being considered by the Ajax Company. A copper condenser can be purchased for $5,000; annual operating and maintenance costs are estimated to be $500. Alternatively, a ferrous
25. A machine can be purchased at t 5 0 for $20,000. The estimated life is 5 years, with an estimated salvage value of zero at that time. The average annual operating and maintenance expenses are
24. The motor on a gas-fi red furnace in a small foundry is to be replaced. Three different 15-horsepower electric motors are being considered. Motor X sells for$2,500 and has an effi ciency rating
23. A manufacturing plant in Michigan has been contracting snow removal at a cost of $400/day. The past 3 years have produced heavy snowfalls, resulting in the cost of snow removal being of concern
22. A business fi rm is contemplating the installation of an improved materialhandling system between the packaging department and the fi nished goods warehouse. Two designs are being considered. The
21. A consulting engineer is considering two pumps to meet a demand of 15,000 gallons/minute at 12 feet total dynamic head. The specifi c gravity of the liquid being pumped is 1.50. Pump A operates
20. Owners of a nationwide motel chain are considering locating a new motel in Snyder, Arkansas. The complete cost of building a 150-unit motel(excluding furnishings) is $5 million; the fi rm
19. An aluminum extrusion plant manufactures a particular product at a variable cost of $0.04 per unit, including material cost. The fi xed costs associated with manufacturing the product equal
18. Two 100-horsepower motors are under consideration by the Mighty Machinery Company. Motor Q costs $5000 and operates at 90% effi ciency. Motor R costs $3,500 and is 88% effi cient. Annual
17. Cowboy Metal Cutting produces a laser cut part based on customer orders.The number of units requested on a customer’s order for the laser cut part can vary from 1 unit to 150 units. Cowboy has
16. A subsidiary of a major furniture company manufactures wooden pallets. The plant has the capacity to produce 300,000 pallets per year. Presently the plant is operating at 70% of capacity. The
15. Video Solution A new manufacturing plant costs $5 million to build.Operating and maintenance costs are estimated to be $45,000 per year and a salvage value of 25% of the initial cost is expected.
14. A manufacturer of precision castings has the capacity to produce 1,000,000 castings per year. Each sells for $15. The variable cost per unit to produce the casting is $9 per casting. Annual fi
13. GO Tutorial To make a batch of 1,000 units, it is estimated that 120 direct labor hours are required at a cost of $10 per hour. Direct material costs are estimated at $1,500 per batch. The
12. A small utility company is considering the purchase of a power driven post hole digger. The equipment would cost $8,000, and have an estimated life of 8 years and a salvage value of $1,000 at
11. Snow Valley Ski Resort has been contracting snow removal from its parking lots at a cost of $400/day. A snow removal machine can be purchased for$25,000. The machine is estimated to have a useful
10. The Cooper Company is considering investing in a recuperator. The recuperator will have an initial cost of $20,000 and a service life of 10 years.Operating and maintenance costs for the fi rst
9. Spending $1,500 more today for a hybrid engine rather than a gasoline engine will result in annual fuel savings of $300. How many years must this savings continue in order to justify the extra
8. Video Solution A fi rm has the capacity to produce 650,000 units of product per year. At present, it is operating at 64% of capacity. The fi rm’s income per unit is $1.00, annual fi xed costs
7. A pipeline contractor can purchase a needed truck for $40,000. Its estimated life is six years and it has no salvage value. Maintenance is estimated to be $2,400 per year. Operating expense is $60
6. A manufacturer offers an inventor the choice of two contracts for the exclusive right to manufacture and market the inventor’s patented design. Plan I calls for an immediate single payment of
5. The Fence Company is setting up a new production line to produce top rails. The relevant data for two alternatives are shown below.a. Based on MARR of 8%, determine the annual rate of production
4. Reconsider Problem 3. Determine whether each of the following statements is true or false by determining the new break-even for each case. Each case is independent of the other cases.a. If the
3. Cecil’s Manufacturing is considering production of a new product. The sales price would be $10.25 per unit. The cost of the equipment is $100,000.Operating and Maintenance costs are expected to
2. Match the terms in the fi rst column with an appropriate defi nition from the second column.
1. Uncertainty can impact many elements of an engineering economic analysis.Given the list of factors below, rank them from most to least uncertain and briefl y justify why you ranked them in the
10. Reconsider the previous problem. After making changes to the production line, Gooey Bites made a profi t of $36,000 by selling 20,000 snack packs.Variable costs were modifi ed by the line changes
9. Gooey Bites sells snack packs for $3 per pack. Variable expenses involved in producing snack packs are estimated to be $1 per pack and fi xed costs for operating the production line are estimated
8. The probability of weather related crop damage during the growing season in a typical year is given by the following table. If the interest rate is 8%, what is the expected present worth of crop
7. Which of the following is not a method typically used for supplementary analysis of engineering economy problems?a. break-even analysisc. risk analysisb. depreciation analysisd. sensitivity
6. If a line for “annual expenses” was to be added to the graph what slope would you expect the line to have?a. Positive slope (line rises as it goes left to right)b. Negative slope (line falls
5. What percentage change in initial investment would cause the project to become unattractive?a. 210b. 120c. 11,000d. Cannot be determined from the information given
4. What is the numeric value of the present worth of the original project (i.e., no changes)?a. 210b. 20c. 1,000d. Cannot be determined from the information given
3. The analysis is least sensitive to changes in which component?a. Annual Revenueb. Initial Investmentc. Salvage Valued. Cannot be determined from the information given
2. The analysis is most sensitive to changes in which component?a. Annual Revenueb. Initial Investmentc. Salvage Valued. Cannot be determined from the information given
1. If the total cost for producing widgets can be represented by TC 5 8,000 1 0.75*X, where X is the number of widgets produced and total revenue can be represented by TR 5 4.00*x, what is the
71. An investment of $600,000 is made in equipment that qualifi es as 3-year equipment for MACRS-GDS depreciation. The before-tax cash fl ows, measured in constant dollars, for the investment consist
70. An investment of $250,000 is made in equipment that qualifi es as 7-year equipment for MACRS-GDS depreciation. Measured in constant dollars, the investment yields annual returns of $40,000, plus
69. A construction company decides to purchase a crane for $250,000. The crane qualifi es as 5-year equipment for MACRS-GDS depreciation. The BTCF profi le for the acquisition, expressed in constant
68. Electronic Games is moving very quickly to introduce a new interrelated set of video games. The initial investment for equipment to produce the necessary electronic components is $9 million, with
67. GO Tutorial Raytheon wishes to use an automated environmental chamber in the manufacture of electronic components. The chamber is to be used for rigorous reliability testing and burn-in. It is
66. Reconsider Problem 65 exactly as written.a. Determine the real after-tax cash fl ows for each year.b. Determine the PW of the after-tax cash fl ows.c. Determine the AW of the after-tax cash fl
65. Video Solution Henredon purchases a high-precision programmable router for shaping furniture components for $190,000. It is expected to last 12 years and have a salvage value of $5,000. Henredon
64. Reconsider Problem 63 exactly as written.a. Determine the real after-tax cash fl ows for each year.b. Determine the PW of the after-tax cash fl ows.c. Determine the AW of the after-tax cash fl
63. Electronic Games is moving very quickly to introduce a new interrelated set of video games. The initial investment for equipment to produce the necessary electronic components is $9 million, with
61. Steinway R&D is pursuing the development of an attachment that can easily clean the inside of grand pianos. This innovation will require a loan of$500,000 for fabrication and testing of several
60. For the situation stated in Problem 59, let the interest on borrowed money go from 5 percent to 15 percent in 1 percent increments. For each borrowing rate, which payment plan is preferred? Do
59. A ham radio operator wishes to borrow $160,000 to construct a world-class antenna system, transceiver, and amplifi er at an electrically quiet location that can be accessed remotely and
58. An investment of $450,000 is made in equipment that qualifi es as 5-year equipment for MACRS-GDS depreciation. The then-current dollar before tax cash fl ows are given by a $50,000 increasing
57. A construction company decides to purchase a crane for $250,000. The crane qualifi es as 5-year equipment for MACRS-GDS depreciation. The BTCF profi le for the acquisition, expressed in constant
56. A manufacturing company decides to purchase a computer for $800,000. The equipment qualifi es as 5-year equipment for MACRS-GDS depreciation. The constant-dollar before-tax cash fl ows can be
55. Specialized production equipment is purchased for $125,000. The equipment qualifi es as 5-year equipment for MACRS-GDS depreciation. The BTCF profi le for the acquisition, in then-current
54. An investment of $600,000 is made in equipment that qualifi es as 3-year equipment for MACRS-GDS depreciation. The before-tax cash fl ows, measured in constant dollars, for the investment consist
53. A surface mount placement machine is purchased for $500,000. The SMP machine qualifi es as 5-year equipment for MACRS-GDS depreciation. The before-tax cash fl ows, in constant dollars, include an
52. Reconsider Problem 51 exactly as written.a. Determine the actual after-tax cash fl ows for each year.b. Determine the PW of the after-tax cash fl ows.c. Determine the AW of the after-tax cash fl
51. Henredon purchases a high-precision programmable router for shaping furniture components for $190,000. It is expected to last 12 years and have a salvage value of $5,000. It will produce $45,000
50. Reconsider Problem 49 exactly as written.a. Determine the real after-tax cash fl ows for each year.b. Determine the PW of the after-tax cash fl ows.c. Determine the AW of the after-tax cash fl
49. GO Tutorial Raytheon wishes to use an automated environmental chamber in the manufacture of electronic components. The chamber is to be used for rigorous reliability testing and burn-in. It is
48. Reconsider Problem 47 exactly as written.a. Determine the real after-tax cash fl ows for each year.b. Determine the PW of the after-tax cash fl ows.c. Determine the AW of the after-tax cash fl
47. Video Solution Henredon purchases a high-precision programmable router for shaping furniture components for $190,000. It is expected to last 12 years and have a salvage value of $5,000. It will
46. Reconsider Problem 45 exactly as written.a. Determine the real after-tax cash fl ows for each year.b. Determine the PW of the after-tax cash fl ows.c. Determine the AW of the after-tax cash fl
45. Electronic Games is moving very quickly to introduce a new interrelated set of video games. The initial investment for equipment to produce the necessary electronic components is $9 million. The
44. An economic analysis is being performed in real (not actual) dollars. The company’s combined MARR is 10 percent, and the infl ation rate is 4 percent. The asset has a fi rst cost of $10,000. It
43. True or False: if the real MARR is 10% and infl ation is 4%, then an investment that yields a combined external rate of return of 13.5% is not justifi ed economically.
42. True or False: if the combined minimum attractive rate of return is 12% and infl ation is 3%, then an investment that yields a real external rate of return of 9% is not justifi ed economically.
41. True or False: when the real return on investment is 6% and the combined minimum attractive rate of return is 10%, then infl ation must be less than 4%.
40. In 2005, Motorola introduced a new smart phone on the market at a retail price of $250; the cost of producing the phone was $50/unit. During 2005, 5 million smart phones were sold. The number of
39. A rental car agency rents cars for an average price of $45/day. The number of cars owned in 2010 totals 150. The number of days rented per car in 2010 equals 200. Hence, the rental revenue in
38. $90,000 is invested in a program to reduce the material requirements in a production process. As a result of the investment, the annual material requirement is reduced by 10,000 pounds. The
37. The unit price of personal computers, measured in constant dollars, is expected to decrease at an annual rate of 10%. However, the number of microcomputers purchased by the company is expected to
36. A landfi ll has a fi rst cost of $270,000. Annual operating and maintenance costs for the fi rst year will be $40,000. These costs will increase at 11 percent annually. Income for dumping rights
35. The infl ation rates for 4 years are forecast to be 3%, 3%, 4%, and 5%. The interest rate exclusive of infl ation is anticipated to be 6%, 5%, 4%, and 5%over this same period. If labor is
34. The following material costs are anticipated over a 5-year period: $9,000,$11,000, $14,000, $18,000, and $23,000. It is estimated that a 4% infl ation rate will apply over the time period in
33. Mellin Transformers, Inc. uses a required return of 15% in all economic justifi cations. Infl ation is anticipated to be 5% over the foreseeable future. What real discount rate are they
32. If you desire a real return of 8% on your money and infl ation is running at 3%, what combined rate of return should you require on your investments?
31. Yearly labor costs of a highway maintenance group are currently $420,000/year. If labor costs increase at a 12% rate and general infl ation increases at 9%, determine for each of the next 6 years
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